- The Washington Times - Thursday, March 12, 2009

It seems big drugmakers haven’t noticed we’re mired in a recession and money is tight.

In recent weeks, several have dropped tens of billions of dollars to buy smaller ones.

Swiss pharmaceutical giant Roche’s $47 billion deal, announced Thursday to buy out biotech pioneer Genentech follows similar deals that would unite Pfizer Inc. and Wyeth, and Merck & Co. Inc. and Schering-Plough.

Q: What’s pushing all these big drug companies to make deals?

A: Call it the Lipitor problem.

The heavily advertised cholesterol medicine is the world’s best-selling drug. It raked in nearly $13 billion last year for Pfizer, the largest drugmaker.

But the patent protecting Lipitor expires in 2011. That means other drugmakers will be able to slash that gaudy sales figure by selling generic versions of the drug for much lower prices.

Several companies face the same problem with looming patent expirations. They need new drugs.

Diversity also plays a role in motivating companies to make these deals. Merck and Pfizer can become broader-based health care companies like Johnson & Johnson with their acquisitions.

Q: Does the lousy economy play a role in fostering these acquisitions?

A: In some cases, it makes the deals cheaper.

Pfizer said in late January it will pay about $50.19 per share for Wyeth. But Pfizer would have had to fork over a lot more if it made an overture before the recession hit. Wyeth’s stock traded for more than $58 in May 2007, and buying all the shares would almost certainly cost more than that.

Interest rates also have fallen, and that can make the cost of borrowing money to finance these deals cheaper for strong companies.

Q: Speaking of borrowing, I thought banks stopped lending and credit markets were frozen. How can drug companies still swing these huge deals?

A: Drugmaker deals rely less on borrowing than some other mergers, because the companies generally have lots of cash after years of fat profits.

They also can offer an exchange of stock; their shares generally haven’t been as hard hit as the broader market. They also can sell bonds to raise money. Most drug companies also have good credit ratings. That makes banks comfortable lending money, even when other companies can’t borrow.

Q: Pardon the cliche, but is bigger better for drug companies?

A: Not always.

Pfizer can attest to this. It struggled with folding in Warner-Lambert Co. after buying the drug company in 2000. Even Pfizer Chief Executive Jeff Kindler, who became CEO in 2006, has said turmoil created by that deal and the 2003 acquisition of Pharmacia Inc. hurt morale and productivity.

Big companies often struggle to merge distinct cultures that have different management styles. Plus turf wars can erupt over how to proceed in areas like biotech drug development.

“They tend to work against each other, at least for a year or two,” said Don Woodley, a principal with Woodley Farra Manion Portfolio Inc., an Indianapolis firm that owns shares of Eli Lilly & Co. and Abbott Laboratories.

“During that period of time, frequently the combined company suffers.”

Q: So, are these deals worth the hassle?

A: The companies think so. They give them a chance to expand their product pipelines while trimming expenses. When big companies join forces, they can reduce their combined payroll by eliminating duplicate jobs.

The recent big deals will result in more than 35,000 job cuts, even before any potential cuts at a Genentech-Roche combination.

And bigger research pipelines potentially means more products, but many never make it to market.

“There is much excitement about the combined drug pipeline, of course, but we tend to curb our enthusiasm about such matters until the cash starts rolling in,” Gimme Credit analyst Carol Levenson wrote in a note to investors on the Merck-Schering deal.

Q: Why aren’t drug companies cranking out new blockbuster drugs on their own, like they did a few years ago?

A: That’s a tough question to answer in a few paragraphs. Drug development has grown more expensive. Companies say it has become more difficult to get new drugs approved.

Edward Jones analyst Linda Bannister also noted that drug development runs in cycles. Cholesterol drugs and newer versions of antipsychotic drugs reaped billions after they were launched in the 1990s. The next frontier, biotech drugs made from living cells, hasn’t fully developed yet.

Science has improved, but, “We’re now trying to cure much more complicated and difficult diseases,” such as cancer and Alzheimer’s, said Erik Gordon, an analyst and professor at University of Michigan’s Ross School of Business.

Q: Which companies will be gobbled up next?

A: Eli Lilly and Bristol-Myers Squibb Corp. could become targets. Bannister noted that they’re relatively small compared with industry-leader Pfizer and a potentially bulked-up Merck. They also face patent expirations.

Woodley also thinks Abbott Laboratories (which also makes medical devices) could attract interest, although it would be a larger target.

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